Trying to time selling and buying property at the right time can prove to be immensely difficult – not to mention stressful. Thankfully, there is something that can help. Introducing… bridging loans! But exactly how do bridging loans work?
Bridging loans quite literally “bridge” the gap between the time when you purchase a new property and get around to selling your existing one. This means that if you see a property that you really love, you can still buy it before selling. In short, it offers you flexibility and can make the buying and selling process far more seamless.
In the same token, however, if you choose to opt for a bridging loan you need to be aware of exactly how they work. Besides, you may not always need a bridging loan – if you know your home will sell quickly, for instance, you could always negotiate an extended settlement period instead. Keep reading to find out if a bridging loan is right for you.
Bridging Loans Explained
A bridging loan is typically a short-term, interest-only loan that enables you to purchase a new property while waiting for the sale of your existing property to be finalised.
These loans are ideal for property investors, upsizers, or downsizers. They can also help if you’ve bought a new property that needs to undergo renovations or extensions.
How Do Bridging Loans Work?
Bridging loans are usually just short-term – for 12 months or less – and are paid off in full when you sell your existing property. Most lenders will offer both open and closed bridging loans.
As the names suggest, closed bridging loans require you to have a pre-agreed date that your property will be sold by, while open bridging loans are a little more flexible. They simply have a general loan term, however, sometimes they require you to present proof that your property is already on the market.
Why are Bridging Loans a Good Idea?
There are several benefits to taking out a bridging loan. Many people opt to use bridging loans for the increased flexibility and peace of mind they offer. These loans give you more choice when it comes to finding the right property. This is especially important when you’re trying to find your new dream home.
This also means you don’t have to rent while you’re trying to sell your property – you can move straight into a new home and simply focus on selling your existing property.
Things to Consider with Bridging Loans
While bridging loans can be a helpful way to cover you in the interim between buying and selling, this doesn’t mean that you should delay selling your home for a lengthy period. There are often penalties in place for not repaying your bridging loan within the agreed period.
Before you apply for a loan you should have a detailed understanding of the current market and the demand in the areas you’re buying and selling in. If you get a bridging loan you need to be fairly confident that your existing property will sell for the price you’re asking. If you’re asking too much, if demand in your area is low, or if your existing property needs refurbishing, your property might take time to sell. In that case, it might be best to sell your existing property first, if possible.
It really depends on your unique situation and your needs but remember that bridging loans are typically interest-only. So, you should calculate the cost of any repayments if it takes 6 or even 12 months to sell your existing property.
If in doubt, always do your research and seek professional advice before making any big decisions. Deep dive into information about the local market or the areas that you’re looking to buy in, assess your financial situation thoroughly and be honest with yourself about what you need.
For more information and advice, check out our other property insights here. Or, get in touch and speak to one of our highly skilled real estate professionals today.